Why You Should Avoid Minimum Payments on Credit Cards

Why You Should Avoid Minimum Payments on Credit Cards
Mark CappelJan 20, 2012
Key Takeaways:
  • Overall credit card debt amount decreased 11% since December 2010.
  • Making even slightly more than minimum payments will slash your interest costs.

Credit Card Balances Fall as People Avoid Minimum Payments

A recent study of credit card debt balances indicates many consumers make more than their minimum payments, which caused the overall credit card debt amount to decrease 11% since December 2010.

Credit Karma, a San Francisco-based Web site that provides credit scores to consumer, found that the average credit card debt amount is $6,576.

According to Credit Karma, the average consumer with an account in 2011:

  1. Kept home mortgage debt steady at $173,876
  2. Decreased home equity debt by 4% to $47,905
  3. Increased auto loans by 2% to $15,504
  4. Decreased student loan debt by 9% to $26,272

Consumers are learning the lesson that paying a credit card minimum payment is a certain way of increasing the cost of borrowing. The high cost of minimum credit card payments, in addition to the sober economy, are contributing to the lower balances Credit Karma found.

How expensive is it to make minimum payments? The Federal Reserve published the following example to illustrate the perils of credit card minimum payments:

Minimum Payment Example
New balance$3,000
Minimum payment due$90
Payment due date4/20/12
Late Payment Warning: If we do not receive your minimum payment by the date listed above, you may have to pay a $35 late fee and your APRs may be increased up to the Penalty APR of 28.99%.
Minimum Payment Warning: If you make only the minimum payment each period, you will pay more in interest and it will take you longer to pay off your balance. For example:
If you make no additional charges using this card and each month you pay…You will pay off the balance shown on this statement in about…And you will end up paying an estimated total of…
Only the minimum payment11 years$4,745
$1033 years$3,712 (Savings = $1,033)

Credit Card Minimum Payment Example

Under the Credit CARD Act of 2009, your monthly credit card bill must include information on how long it will take to pay off a balance if you only make minimum payments. It will also tell you how much you would need to pay each month to pay off your balance in three years.

Personalized Minimum Payments Calculator

To illustrate how easy it is to save a tremendous amount of interest expense by making even slightly more than minimum payments, Bills.com created a minimum payments calculator.

To see why paying the minimum amount is so expensive, enter your credit card debt and your interest rate into the Bills.com minimum payments calculator. Enter the amount you can afford to pay and find out how much faster you will be debt free and how much interest you will save by making the same payment every month.